What are the Basics of Backtesting?

Are to trying to learn the basics of backtesting? There is also some obscurity with the backtesting as if it’s even useful for traders. Yes, it works and even used by professionals all over the world.

Even the most complicated trading software or automated trading platform relies upon backtesting to provide results to traders.

But it should also be kept in mind that backtesting alone cannot guarantee your trading strategy’s success. So, always double-check your results with forward or out-of-sample testing.

What is Backtesting?

Backtesting refers to testing a trading system using historical data to verify how a system would have performed during a specific period of time.

Nowadays many trading systems support backtesting which allows traders to test their trading strategy without risking any real money.

How Important is Backtesting?

It gives traders an insight into the effectiveness of their ideas with just a few keystrokes without actually putting any funds in a trading account. Backtesting can help in analyzing ideas, for instance how an average crossover performs on past data or a more complicated system with few inputs and triggers.

As long as a trader’s idea can be quantified, it can be backtested. Some traders seek out qualified programmer expertise to develop the idea into a testable form. Meaning coding of an idea into proprietary language hosted by the trading platform.

This allows traders to “tweak” the system through a user-defined input variable incorporated by the programmer.

For instance, let’s consider a simple moving average crossover system as a user-defined variable that can be changed according to the need of the trader as in the length of the two moving averages. Thus allowing the function of backtesting in evaluating which out of two moving averages would perform better or best on the historical data.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *